One of the key defensive cornerstones of multi-asset and equities portfolios since the end of the GFC has been the use of property and infrastructure securities. The typical structure is a trust, holding assets or part ownership of assets, an optimal quantity of financial leverage, an delivering a stable and consistent income.
We will argue in this note that selectivity and a discerning eye will now be required in this asset class, with the use of ETFs for broad passive coverage now fraught with risks now we have entered a new market paradigm.
What characterises this paradigm and how does it differ from the traditional view of this asset class?
To answer that question requires us to consider what effectively a lockdown means for our assumptions of the stability and predictability of cashflows for these assets. What the lockdown highlights, is that cashflows are far from predictable or certain, when clients and customers are unwilling or unable to utilise the infrastructure once deemed “recession proof”.
Suddenly the utilisation of the asset, and hence the revenue stream, develops a level of risk, perhaps not associated with the business cycle, but more associated with government policy around pandemic risk, and our willingness even in the absence of a lockdown, to mingle freely with our fellow citizens in a workplace or a shopping centre, where there is no exacting requirement to do so.
Sell-side forecasts are already starting to reflect the uncertainties associated: